Login to access your documents and resources.
Where are you located?
  • Asia Pacific
    • Japan (日本)
    • This website is directed only to residents of Japan that are institutional investors.  Therefore, only investors that satisfy this criteria should access this website. If you are a retail investor, you should leave this website immediately.

      You must read the following information carefully before proceeding. It provides information on certain restrictions imposed by law on the distribution of the information contained in this section of this website and the jurisdiction in which the products or services described in this section of this website are able to be offered. It is your responsibility to be aware of and to observe all applicable laws and regulations relevant to your jurisdiction.

      We recommend that you review our full Website Terms of Use, Privacy and Cookie Policy (which you can read here) before using this section of the website.

      The contents of this website have been prepared for informational purposes only without regard to the investment objectives, financial situation, or means of any particular person or entity, and Nuveen Japan Co. Ltd. is not soliciting any action based upon them. No information included on this website is to be construed as investment advice or as a recommendation or a representation about the suitability or appropriateness of any fund or advisory product or service; or an offer to buy or sell, or the solicitation of an offer to buy or sell, any product or service. Nuveen Japan Co. Ltd. recommends that you seek independent financial and tax advice before making any investment decision. Nothing in this section of this website constitutes an offer or solicitation to anyone in any jurisdiction where such an offer is not lawful or to anyone to whom it is unlawful to make such an offer or solicitation. In particular, but without limitation, this website should not be accessed by US Persons. This website is reserved exclusively for non-US persons and should not be accessed by any person in the United States. This website is not an offering to or solicitation of US Persons.

      All material on this website has been obtained from sources believed to be reliable, but its accuracy is not guaranteed: some of the content on this website may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. From time to time, Nuveen Japan Co. Ltd. may also make additional features available to users on this website on such terms and conditions as may be set forth in a modification to this agreement or otherwise on this website. This website is owned and operated by Nuveen, LLC and Nuveen Japan Co. Ltd.

      I confirm that I am resident in Japan and I am an institutional investor.

  • The Americas
Don't see your location?
Asset allocation

Optimizing outcomes through alternatives:
Private credit

Randy Schwimmer
Head of Origination and Capital Markets, Senior Lending
View up a spiral ramp

Private credit

Middle market private lending has surged in popularity since the Global Financial Crisis. U.S. senior middle market loans have typically yielded between 6% and 8% since 2010, and the illiquidity premium between middle market loans and broadly syndicated loans has averaged 1.8% during that period, according to LC/S&P Global.

This has provided a boost to yields, making middle market loans an effective alternative source of income with a risk profile that varies significantly from other types of debt.

Considerations for risk factor-based investing

Minimizing losses is the name of the game 
The upside for private credit investments is limited simply because of the nature of these instruments. As a result, minimizing losses is paramount. The U.S. middle market is enormous, with nearly 200,000 companies generating approximately $6 trillion in revenue, according to the National Center for the Middle Market. If the U.S. middle market were its own country, it would have the world’s third-largest GDP. This is a massive pool for middle market lenders to operate in, meaning that deal selectivity for lenders is key.

Conservative structuring provides a level of protection 
Middle market loans are typically more conservatively structured, with lower leverage multiples, higher interest coverage and tighter covenant packages than broadly syndicated loans. Most importantly, private credit assets are illiquid and do not trade. This distinguishes them positively from larger, liquid public assets, which are more volatile because they are marked to market. Consequently, middle market loan yields have been more stable through multiple business cycles.

Illiquidity premium fuels middle market loans’ attractive yield 

Pay close attention to sponsor behavior 
In addition to evaluating the company and its sector, lenders should scrutinize the private equity firm that is backing the company. We recommend only lending to companies where private equity accounts for at least 50% of the capital structure. This creates natural alignment between the lenders and financial sponsors, who are the primary source of long-term capital for the business. By observing how sponsors have behaved when their other portfolio companies have run into trouble, a lender can get a sense for whether the sponsor will be committed to reinforcing a company during a downturn. 

Beware of covenant-lite documentation 
When lending to middle market companies, covenants provide an important layer of protection for lenders. In the years preceding the coronavirus pandemic, lenders became increasingly aggressive to win deals, often offering borrower-friendly terms and covenant-lite documentation. We believe that this was a perilous trend for middle market lenders.

Customization provides multiple levers for accessing idiosyncratic risk 
The high levels of customization available and negotiated loan origination inherent in private credit allow investors to access idiosyncratic risk and alpha generation potential. For senior private credit specifically, the floating rate feature enables the investor to distinguish credit risk from duration risk. Additionally, senior private credit investments have shown a relatively high correlation to inflation. This provides inflation-hedging properties not typically found in fixed income investments.

Figure 4: Risk measures vary by asset class 

COVID-19 impact: Headwinds create opportunities for nimble managers

Private credit has seen a dramatic halt in deal activity, and investors’ focus has shifted to understanding how portfolio companies — and their financial sponsors — are dealing with the crisis. This type of environment highlights the need to pay close attention to sponsor behavior and assess whether they are being a constructive partner and providing incremental capital to companies that are otherwise well-positioned.

We expect to continue to see attractive opportunities in senior secured loans to sponsor-backed, middle market companies going forward. The best time to deploy capital is often during the most challenging market environments, and we believe that this crisis will present some of the most attractive opportunities we have seen in years from a risk-adjusted returns perspective. Liquidity will be key to capturing opportunities in this environment.

The crisis highlights the benefits of working with private credit managers who have scale, capital, strong relationships and the ability to act quickly. These managers will be best positioned to both support existing portfolio companies and benefit from attractive opportunities as they emerge.

Contact us
Our offices
London skyline
201 Bishopsgate, London, United Kingdom

All market and economic data from Bloomberg, FactSet and Morningstar. 

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. 

Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible. 

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, or liability for, decisions based on such information, and it should not be relied on as such. 

A word on risk 

All investments carry a certain degree of risk, and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. In portfolios that include lower-rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Credit ratings are subject to change. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC/CC/C and D are below-investment grade ratings. As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties. Socially Responsible Investments are subject to Social Criteria Risk, namely the risk that because social criteria exclude securities of certain issuers for nonfinancial reasons, investors may forgo some market opportunities available to those that don’t use these criteria. Investors should be aware that alternative investments including private equity and private debt are speculative, subject to substantial risks including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments and may involve complex tax structures and investment strategies. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. Alternative investments are not suitable for all investors and should not constitute an entire investment program. Investors may lose all or substantially all of the capital invested. The historical returns achieved by alternative asset vehicles is not a prediction of future performance or a guarantee of future results, and there can be no assurance that comparable returns will be achieved by any strategy. 

Nuveen provides investment advisory services through its investment specialists.